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Competition and public markets – FELS – December 2017 OECD discussion

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This presentation by Allan FELS AO (Professor, University of Melbourne, Monash & Oxford and former Chair of the Australian Competition and Consumer Commission) was made during the session on Competition in public markets held at the 16th meeting of the OECD Global Forum on Competition on 8 December 2017. More papers and presentations on the topic can be found out at oe.cd/28n

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Competition and public markets – FELS – December 2017 OECD discussion

  1. 1. Competition and choice in education, health care and other public services Allan Fels and Darryl Biggar Global Forum on Competition 8 December 2017
  2. 2. Motivation • Education, health care and other public markets comprise a large proportion of GDP and government spending. • Yet the scope for competition and choice in these sectors is often limited or deliberately restricted. • Can we use choice and competition to improve outcomes in these sectors? Education spending (excluding tertiary) in selected OECD countries as a percentage of total public spending; Source: OECD 2
  3. 3. The overall question: To what extent can we harness the forces of competition to deliver greater efficiency and better outcomes for consumers and users of education, health care and other public services while preserving (or better promoting) the underlying public policy objectives in these sectors? 3
  4. 4. Introductory comments • This is not an ideological exercise but an assessment of whether there is scope for better outcomes while not sacrificing key policy objectives. • The focus is not on contracting out or competitive tendering – rather on choice and competition “in the market”. • There is a large literature on these issues, including work by the OECD which we can draw on… 4
  5. 5. Methodology For each sector we follow a three-step approach 1. What is the underlying rationale for government action? 2. What are the barriers to effective choice and competition? 3. What might a framework of effective choice and competition look like? 5
  6. 6. Subsidies and competition • Education and health care are heavily government subsidised. • The manner in which those subsidies are paid strongly affects the scope for choice and competition. • If the subsidy is paid as a “fixed price”, this is compatible with choice and competition, but may give rise to problems, such as cream-skimming. Government pays fixed price to supplier chosen by the user/consumer Pros: Strong incentives for suppliers to compete to best meet the needs of the customers Cons: Suppliers have a strong incentive to identify and refuse to serve some higher- cost customers… 6
  7. 7. Education: The rationale for intervention? There are many rationales for public provision of education, such as: • Productivity externalities • Citizenship (democracy) benefits • Credit market failures In our view, the primary rationale for government subsidization of education is to ensure that a functional level of education is available to all citizens regardless of family background. • An equality-of-opportunity argument Stiglitz (Nobel prizewinner): “There is a widespread believe that the life chances of a child should not depend on the wealth of his parents or the happenstance of the community in which his parents live” 7
  8. 8. Education: The scope for competition • There is scope for competition between rival schools especially in larger urban areas. • Some assistance with transportation may be required. • Competition may not be feasible in rural areas, or for specialist schools. • Some parents may not be willing or able to make effective choice and may require assistance. • Schools must have the freedom to compete and must be free to enter and exit the market. 8
  9. 9. Education: Pro-competition reforms? • We must not ration access to education on the basis of ability to pay. • No “topping up” allowed? • The setting of the fixed fee or payment is very important to prevent schools competing vigorously for the low cost-to- serve students while rejecting higher-cost students. • “Cream-skimming” must be prevented. 9 with
  10. 10. Choice and competition in education • Many countries have experience with competition in the education sector. • This experience has been surveyed, e.g., in works by Julian Le Grand and by the OECD. Is it possible to design a system which encourages choice and competition, promoting efficiency and effectiveness in education, and greater responsiveness to customers’ needs without increasing stratification or segregation in the school system? We remain hopeful! 10
  11. 11. Health care: Rationale for intervention? • Why are governments involved in health care? Two arguments: • Competitive markets for short-term health insurance cannot protect customers against risks of long-term (chronic) health conditions. • Access to health care is important for equality of opportunity. • We will focus (in this presentation) on achieving competition within a single-payer system (as in most OECD countries). 11
  12. 12. Health care: Scope for competition • Competition is feasible for most common medical procedures, especially in urban areas. • Competition may not be feasible in specialised or infrequent services (e.g. lung transplant). • Competition may not be feasible in remote or rural areas. • Patients are not well informed and are likely to need assistance in making the choice decision. • Hospitals must be able to compete and must be able to enter and exit the market. From the Harvard Business Review: 12
  13. 13. Health care: Pro-competition reforms? • Many countries and systems use various forms of fee-for-service or prospective payments. • Careful definition of the fee is necessary to avoid cream skimming. • Many countries use carefully differentiated “Diagnostic-Related Groups.” • Australia has an independent hospital pricing authority. • Concerns remain about role of GP as gatekeeper or over-servicing. 13
  14. 14. Other public services • Similar competition issues arise in other markets which feature significant government subsidies. • One approach is to pay subsidy direct to consumer, allowing them to choose how to spend the funds in a way that best meets their needs. • Such approaches are common in, say, the provision of disability services or housing services. 14
  15. 15. Conclusion • It is important to ensure that education, health care and other public services are delivered as efficiently as possible, consistent with government objectives. • Choice and competition may have a role to play in enhancing incentives. • Pro-competitive reforms have to be done in a way which does not undermine the underlying social problem. • With appropriate safeguards there is some scope for pro-competitive reform in these sectors. • Careful attention must be paid to ensuring customers are willing and able to make an effective choice, and that effective competition can be sustained. • OECD countries have some experience which may yield valuable lessons. 15

This presentation by Allan FELS AO (Professor, University of Melbourne, Monash & Oxford and former Chair of the Australian Competition and Consumer Commission) was made during the session on Competition in public markets held at the 16th meeting of the OECD Global Forum on Competition on 8 December 2017. More papers and presentations on the topic can be found out at oe.cd/28n

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